Overview of the Mongolian Legal System and Laws

By Chris Melville, Erdenedalai (Dalai) Odkhuu, Baigalmaa Tsookhuu and Undraa Sergelenbaatar

Chris Melville is a founding Partner of Melville Erdenedalai LLP (M&E), Prior to founding his own firm, Chris Melville was the Managing Partner of Hogan Lovells (Mongolia) LLP.. He has been based in Mongolia since 2012. Chris’s practice in Mongolia includes foreign investment law, corporate law and M&A, joint venture, banking and finance, and infrastructure projects. He has extensive experience of emerging market jurisdictions, having advised clients on cross-border investments relating to the Russian Federation for over 10 years prior to relocating to Mongolia, including a two-year period spent in Moscow with Hogan Lovells CIS. Recognised as a leading lawyer by several legal directories, Chris is a monthly contributor to the De Facto Gazette, an English language biweekly publication on Mongolian politics and economics. He is Honorary Legal Advisor to the British Ambassador to Mongolia.

Erdenedalai (Dalai) Odkhuu is one of the founding partners of Melville Erdenedalai LLP. He provides strategic legal advice, practicing mainly in mining, telecommunications, energy and renewable energy, infrastructure, petroleum, and finance. His practice includes negotiation, competition and regulatory law, M&A, financing and security, restructuring, and licensing and compliance law. Before starting M&E, Dalai was the Mongolian Partner of Hogan Lovells Mongolia LLP. Before joining Hogan Lovells, Dalai worked as a vice-president of legal and compliance of the TenGer Financial Group and as corporate governance and legal consultant to the International Finance Corporation (IFC). He also worked as a project implementation unit director for IBLIP, a World Bank-funded project and acted as a legal advisor to the Ministry of Finance. Dalai received his LL.M from Harvard Law School and he is admitted to practice in New York and Mongolia. He also completed his LL.M in International Corporate Governance and Financial Regulation from Warwick University, UK. He has a LL.B/BA in International Law from Law School of the National University of Mongolia and he is the Honorary Consul of the Republic of Malta in Mongolia.

Baigalmaa Tsookhuu is an associate with Melville Erdenedalai LLP. She has a wide range of experience in M&A, joint ventures, due diligence, financing and securities, procurement, licensing, real estate, incorporations and restructuring, employment, competition, project finance, tax, compliance and regulatory matters, with a special interest in energy and mining, banking and finance, and international arbitration. Prior to joining the firm, she worked for Hogan Lovells (Mongolia) LLP for 4 years. She received her LL.B from the University of Tokyo. Baigalmaa is a member of the Mongolian Bar Association and is qualified to practice law in Mongolia.

Undraa Sergelenbaatar is an associate with Melville Erdenedalai LLP. Her practice area include various aspects of corporate and commercial law with specific focus on corporate, banking, finance, securities, mining, infrastructure projects, compliance and regulatory law. Prior to joining the firm, Undraa worked for 8 years as a senior legal and compliance lawyer at a premier Mongolian mining conglomerate listed on the Hong Kong Stock Exchange. She is a member of the Mongolian Bar Association and is qualified to practice law in Mongolia.

This article is intended to aid anyone involved in international commercial transactions, research, and anyone interested in Mongolian law.

Published September/October 2019

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1. Introduction

Mongolia, located between Russia and China, and after almost seven decades of Communist rule, formally transitioned to a multi-party system and market economy with the adoption of a new democratic constitution (“Constitution”) on 13 January 1992. With a land area of 1.5 million square kilometres and population of just over 3 million, Mongolia sits atop some of the largest mineral reserves in the world.

2. Overview of the Mongolian Legal System

2.1. Historical Overview

Since the establishment of the Mongol Empire in 1206, the development of the Mongolian legal system can be divided into four main historical stages:

Mongol Empire Period — this is the period of the formation of the roots of Mongolian legal system. Chinggis Khan’s Ikh Zasag Law, commonly known as Yassa, written sometime between 1206 and 1218, was for the most part a codification of the general principles of law already held by the tribes under his command. Although no Mongolian scroll or codex of Yassa has been found, the Yassa decrees were thought to be comprehensive and specific. With the help of Yassa, Chinggis Khan and his descendants were able to establish a basic rule of law throughout their conquered territories. The influence of Yassa may still be found in Mongolia in the form of customs and mores.

Laws of the sixteenth to nineteenth centuries — the collection of laws from the 16th-19th century has survived in the Mongolian-Oirat Laws of 1640 and the Khalkh Juram Law of 1709. Largely based on the previous legal tradition, these laws legally strengthened and guaranteed social relations in Mongolian society. The common thread that was present in all these laws were their aim to adapt to the changing social and political environment while preserving Mongolians’ rich legal tradition.

Socialist Period (1924-1992) — Following the Soviet Union, Mongolia became the second socialist state in the world in 1924 with the adoption of a socialist constitution. This constitution, followed by two further socialist constitutions in 1940 and 1960, established a civil law tradition in Mongolia and underpinned a socialist period of almost seven decades. These three constitutions enshrined communism as the guiding ideology of the country. Only state and cooperative property, not private property, were recognised as the foundation of the economic system of the country, and many basic human rights such as free speech and freedom of movement were denied.

Democratic Period (1992-present) — with the adoption of the Constitution in 1992, Mongolia declared its vision to build a “humane, civil, and democratic society.” Based on this Constitution, Mongolia established a parliamentary democracy and initiated the transition to a multi-party system and market economy. Even though the new democratic Constitution overhauled the previous socialist constitutions, their influence is very much present in Mongolia, and the modernisation of the Mongolian legal system remains a work in progress.

2.2. Key Elements of the Modern Mongolian Legal System

2.2.1. Mongolian Legal System

The Mongolian legal system established on the basis of the 1992 Constitution is a civil law system primarily based on the continental or Romano-Germanic tradition, although it retains some typical aspects of the Soviet legal system. The Civil Codeof Mongolia itself is ostensibly modelled on the major continental European codifications, in particular the German Civil Code.

In reality, the sources of the Mongolian legal system are far more complex and diversified than is often described by academics. The reason for this is that several multilateral and development agencies and academics from various countries have been involved in the drafting of new legislation. In many cases, this has created inconsistencies between different laws and legislative acts both in terms of concepts and terminology.

Generally, Mongolia adheres to the Romano-Germanic legal system’s division between civil and public law. Although criminal law is classified as a separate division, some legal scholars agree that it should be regarded as a specialised part of public law.

Public law is concerned with the legal relationships between the citizen and the state, or the manifestations of the state in the form of public authorities. Most public law actions take place in the administrative courts.

Civil law contains a concentration of legal principles concerned with the regulation of civil life, or in other words, the legal relations between private individuals. Transactions undertaken between a public body and an individual are governed by civil law and not public law rules.

2.2.2. Sources of Law

The main sources of law in Mongolia are: (i) the Constitution; (ii) international treaties; (iii) parliamentary laws (known as statutes in common law jurisdictions); (iv) other types of legislative acts; and (v) interpretations (resolutions) of the Supreme Court.

The Constitution of Mongolia: The Constitution, the supreme source of law in Mongolia, lays out the leading principles of the state, its organisation, and the basic rights of the individual. The ultimate objectives of the people of Mongolia provided in the Constitution are to strengthen the independence and sovereignty of the state, cherish human rights and freedoms, justice and national unity, inherit the traditions of national statehood, history and culture, respect the accomplishments of human civilization, and build a humane, civil and democratic society in Mongolia. The Constitution proclaims that the sole source of state power is the people of Mongolia. The people exercise this through their direct participation in state affairs as well as through the representative bodies of state power elected by them. State power, in turn, is influenced by a separate legislature, executive, judiciary, and the activities of all other organisations and citizens.

The Constitution abolished the previous socialist system, eliminated Communist ideology and the objective of creating a socialist or communist system, and established a system for private ownership and freedom of entrepreneurship. In addition, the Constitution grants human rights and freedoms in accordance with universally-accepted principles and international legal norms.

Statutes: Statutes are the main source of law in Mongolia. As of March 2019, more than 684 laws exist.[1] The right to enact laws is reserved exclusively to the legislature, the State Great Khural (“Parliament”). Only members of Parliament, the Cabinet, and the President of Mongolia may initiate draft legislation.

Legal Acts: In Mongolia, legal acts in the broad sense of the term can take any number of forms, including Parliamentary resolutions, presidential decrees, cabinet resolutions, and ministerial or agency rules, procedures, and orders.

Parliamentary resolutions are governed by Law on the State Great Khural. This law specifically grants Parliament the authority to issue decisions, which have the title of resolution. Parliamentary resolutions regulate the Cabinet and other organisations by defining policies or ordering implementation of those policies.

Executive power in Mongolia resides with the Cabinet, which, limited by the Constitution, laws, and normative acts of Parliament, issues resolutions and ordinances. Cabinet resolutions have many forms and functions. In their simplest form they are used to adopt the decisions of a higher level of government. For example, the Cabinet may issue a resolution formally adopting a law which has already been voted on by Parliament. Resolutions can, however, also rise to the level of regulation. If these resolutions and ordinances are incompatible with laws and regulations, the Cabinet or Parliament may invalidate them.

The forms of administrative actions are classified as (i) administrative acts; (ii) administrative contracts; and (iii) administrative normative acts that set out norms and standards under the recently adopted General Administrative Law of Mongolia (“General Administrative Law”). The General Administrative Law provides particular procedures that need to be followed when adopting either of these forms.

The President is specifically authorised to issue decrees in accordance with the Constitution and Mongolian laws. Presidential decrees must conform to the rights granted by the Law on the Presidency (“Presidency Law”). These rights were originally listed in the Constitution and again in the Presidency Law.

All ministries and agencies have the power to issue normative acts pursuant to specific delegation of authority from Parliament and Cabinet. The acts of ministries and other government agencies of Mongolia are called rules and procedures.

Only laws, Parliamentary resolutions, and Cabinet resolutions may be universally implemented. All other normative acts are restricted to the sector for which a given ministry or agency is responsible.

As declared by the Constitution, legal acts may be issued by the governors of the provinces (“Aimag”), the Capital City, districts (“soum“), municipal districts (“duureg“), subdistricts (“Bag“), and municipal subdistricts (“Khoroo“). These legal acts are called “ordinances” and must conform to the laws of the nation.

Judicial Practice: As precedent is not considered to be a source of law in Mongolia, the courts in the modern Mongolian legal system play no formal role in law creation. In Mongolia, judges are only to apply law, not create it. Decisions issued by the various courts do not have precedential value, and there is no concept of stare decisis. Whilst judicial decisions of the Supreme Court are binding upon all courts and other persons for the particular purpose of that case, they have no further effect on legislation. Therefore, they do not become “law” in a general sense.

International Law: The status of international law in the Mongolian legal system was dramatically transformed by the adoption of the Constitution in 1992. The Constitution provides that “the international treaties to which Mongolia is a party shall become effective as domestic legislation upon the entry into force of the laws or on their ratification or accession.” If the international treaty is in conflict with domestic laws, the provisions of the international treaty are to take precedence.

On 1 December 2016, Parliament approved the revised Law on International Treaties (“International Treaties Law”). The International Treaties Law regulates relations concerning the conclusion, ratification, explanation, implementation, amendment and termination of bilateral and multilateral international treaties as well as accession to and withdrawal from existing bilateral and multilateral international treaties.

Bilateral and multilateral international treaties determine the rights and responsibilities of Mongolia, Parliament, the Cabinet, as well as single or multiple foreign countries, their governments, or international organisations with regard to certain issues. The term “international treaties” refers to all interstate or inter-governmental documents, irrespective of their form and appellation.

Legal Doctrines: Legal doctrines are not considered as a source of law. Therefore, Mongolian and foreign academic opinions are not taken into account when a court makes a decision. It is not the practice of Mongolian courts to cite the published works of jurists when issuing a judgment.

Publication and Entry into Force of Legislation: Parliament officially promulgates national laws through their publication and, unless a law provides otherwise, it becomes effective ten days after the date of publication. Legal information is disseminated through various news outlets, and the State Gazette is the official publisher of all laws and Parliamentary resolutions. The Legal Institute of Mongolia maintains the legal reference database and disseminates legal information to the public.

2.2.3. Interpretation of Laws

According to the Constitution, the Supreme Court provides official interpretations related to the correct application of all laws other than the Constitution. The formal interpretations of the Supreme Court take the form of resolutions. In the Mongolian legal system, the interpretation of legal norms is considered a special type of legal activity, which is intended to discover the content of the meaning of legal norms. The interpretation of law is classified by its method as grammatical, logical, systematic, historical or special legal interpretation.

2.3. Executive Branch

The main function of the executive branch is to implement the laws of Mongolia as passed by Parliament. The Prime Minister is the head of the executive branch, and he or she is nominated by the ruling party, confirmed by the President, and then approved by Parliament. The Prime Minister chooses the members of the Cabinet, subject to Parliament’s approval.

The Cabinet is the highest executive body of Mongolia. The Cabinet will dissolve upon the resignation of the Prime Minister, or the simultaneous resignation of half of the Cabinet, or on a no-confidence vote in Parliament. The Cabinet and its ministers are accountable to Parliament. The Cabinet is also one of the three bodies that may introduce bills to Parliament.

2.4. Judicial System

Courts of Ordinary Jurisdiction: Mongolia has three levels of ordinary courts.

  • First instance courts: Soum, Inter-Soum and Duureg Courts have jurisdiction in first instance cases for both criminal and civil matters.
  • Appellate courts: Aimag courts, found in the Aimag capitals, and the Capital City Court in Ulaanbaatar, have first instance jurisdiction in cases of more serious crimes and in civil matters where the amount in dispute is over MNT 10 million. They also deal with appeals from the lower level courts. The judges of these courts sit in both first instance and appeal cases.
  • At the highest level is the Supreme Court in the capital city Ulaanbaatar, which deals with any matters at first instance that are not specifically within the jurisdiction of the other courts, as well as appeals from decisions of the Aimag courts and the Capital City Court.

Administrative Courts: The main function of the Administrative Courts is to review the constitutionality of the entire range of administrative action, particularly where it encroaches on basic rights. The Administrative Courts were first established in Mongolia by Parliament in June 2004. They deal with the area of law concerned with disputes between the public authorities and individuals arising from the exercise of public authority, including both legal and natural persons. This is regulated by the Law on Administrative Procedure. Any disputes which arise from an administrative act and which may affect a person’s rights may be challenged before these courts. All areas of public life are covered including police, schools, infrastructure services, and the civil service.

Constitutional Court: Mongolia followed the example of some other civil law countries and established the Constitutional Court of Mongolia (“Tsets”) to examine and settle constitutional disputes at the request of Parliament, the President, the Prime Minister, the Supreme Court, the General Prosecutor, on its own initiative, or on the basis of petitions received from citizens. Most of its work involves the latter, and for example, Tsets received some 200 petitions and requests in 2018. However, a substantial number of these do not fall within its jurisdiction and are transferred to the ordinary courts or other institutions. Most of the petitions that are considered concern human rights violations by state officials.

The nine judges of the Tsets panel are appointed by Parliament for a term of six years. Members must be at least forty years old and have a legal and political background. Four are full-time and five are part-time members, with three are nominated by Parliament, three by the President and three by the Supreme Court. Hearings are conducted before a panel of five. Decisions on the conformity of laws, decrees or international treaties with the Constitution must be submitted to Parliament for approval. If the approval is refused, the Tsets will reconsider with a full panel. The decision is then final and binding. Judgments of the Constitutional Court are published in the government gazette and the government newspaper.

The Judicial General Council: To help ensure the independence of the judiciary, the Judicial General Council was created in 1993. It has twelve members: the Chief Justice, the General Prosecutor, the Minister of Justice, a Secretary appointed by the President, two members appointed by the Supreme Court, two by Parliament, two representing the Aimag and Capital City Courts, and two representing the first instance courts.

The role of the Judicial General Council includes submitting proposals to Parliament with respect to the judiciary’s budget, personnel and court buildings, recommending candidates for appointment to the judiciary, organising training courses for judges, and making payments to judges and court officials.

Judges: Mongolia has over 700 positions for judges, of which around 475 are filled so far,[2] that are appointed for life by the President based upon the recommendation of the Judicial General Council. This is in contrast to the previous system in which appointments were for a fixed term. The Supreme Court selects one of its members to be Chief Justice. Appointment for the six year term is made by the President. On the recommendation of the Chief Justice, the President also appoints the two Senior Judges who preside over the Supreme Court’s civil and criminal chambers.

The workload of judges has increased substantially over the last few years and the types of cases with which they deal has changed. Under the socialist system, most of their work was criminal. According to the statistical research, in 2014, four-fifths of all cases were civil, primarily involving contractual disputes, and the rest were criminal and administrative cases. One judge resolves on average 122-185 cases annually according to the same research.[3]

2.5. Legal Profession

There are several groups of legal specialists who make up what could be called the legal profession in Mongolia: prosecutors, judges, advocates, and other lawyers. These groups have separate structures and rules and different admission requirements. Despite the differences between these groups, however, there seems to be great fluidity in the legal profession, and its members do not expect to stay in one branch of it for their entire career. Rather, they move easily between roles as prosecutors, judges, advocates and government advisors, as well as to less strict legal roles such as the police or tax inspection.

The Mongolian Bar Association is the key institution that administers the bar examination and grants permission to practice law in Mongolia. Lawyers admitted to the bar must adhere to the Lawyer’s Code of Conduct.

3. Civil Code

After the Constitution, theCivil Code is the fundamental law of Mongolia which sets out the general regulation of matters connected with tangible and intangible property. Particularly, the Civil Code regulates the rights to ownership and possession of property and contractual and non-contractual duties in relation to property. Therefore, the Civil Code governs general contractual relations among legal persons including individuals and legal entities.

The Civil Code recognises basic principles of the rule of law and contractual laws including: (i) equality of participants; (ii) independency of participants; (iii) inviolability of ownership; (iv) freedom of contract; (v) non-interference of the state in private matters; (vi) unrestricted implementation civil rights and obligations; (vii) restitution; and (viii) court protection.

The Civil Code also sets out an important characteristic of the Mongolian legal system; i.e., the principle that commercial acts are lawful so long as they do not conflict with existing laws. In other words, Mongolia has adopted a principle similar to the common law notion of “that which is not prohibited is permitted.” This enables legal entities to structure sophisticated commercial transactions that are not expressly endorsed by existing law and policy but do not violate laws or regulations. While the principles underlying such structures are often untested by Mongolian courts, this “the freedom to contract” injects an element of creativity and liberality in the structuring of commercial transactions.

Another example of liberality in the Civil Code is the freedom to reply upon non-Mongolian law and dispute resolution. For example, with limited exceptions, the parties to a contract may select the law of a foreign jurisdiction to govern the interpretation of the terms of their contract in the event of a dispute. Overseas arbitration is permitted. Foreign language versions of contracts may prevail over their Mongolian language counterpart.

Nonetheless, the Civil Code does include various legal concepts that are unique to Mongolia. As a civil law country, Mongolia accepts the enforceability of penalties as opposed to liquidated damages. However, the classification of penalties is a locally-developed principle which is not fully clarified in the view of some Mongolian legal scholars. Likewise, statutory termination rights under certain types of contracts (including contracts for work) are considerable extrapolations from their original civil law bases.

4. Criminal Law

The revisedLaw on Criminal Procedure enacted on 18 May 2017 provides the regulatory framework within which criminal investigations and criminal court proceedings take place. No one can be suspected of a crime and subjected to arrest without establishing the grounds provided by the revised Law on Criminal Procedure.

On 3 December 2015, the Parliament of Mongolia adopted the revised version of the Criminal Code. The revised Criminal Code came into force on 1 September 2016. Under the revised Criminal Code, crimes are classified into two types depending on the length of imprisonment: (i) minor and (ii) grave. There are five types of punishment: (i) fine, (ii) community based (forced) labour, (iii) restriction of travel rights, (iv) imprisonment and (v) deprivation of right. Legal entities in addition to persons that have committed crimes in the territory of Mongolia are now subject to the criminal liability under the revised Criminal Code.

5. Commercial Law

Since the formal transition to a market economy in 1992, modernising commercial regulations and attracting foreign direct investment have become an important priority for Mongolia. Especially following the mining boom that began in 2009, numerous commercial laws were passed or revised by the Parliament. Although these laws and regulations are generally aimed at creating a more favourable investment environment in Mongolia, attempts were also made to impose restrictions on foreign investment for the protection of national security. As a result of these competing attempts, Mongolia has undergone several rounds of changes to its commercial laws.

What has emerged from this process in the past few years is a rapidly changing business environment where Mongolia is making an effort to quickly put in place the necessary commercial regulations, which simultaneously makes it prone to passing laws with loopholes and inadvertent adverse effects.

The following are the key commercial laws that provide an overview and understanding of the business environment in Mongolia.

5.1. General Business Environment

5.1.1. Opening a Business

Seeing the ease of registering legal entity as an important step to ensure business enabling environment, the Parliament attempted to simplify the registration process when on 21 June 2018 it revised the Law on State Registration of Legal Entities, which has become effective from 1 November 2018, eliminating uncertainties of the previous law on legal entity registration, removing some of the bureaucratic steps and requirements and encouraging online registration.

According to the revised law, the statutory processing time for registration for domestic legal entities remains no more than 2 working days, while for foreign-invested legal entities, the application period was shortened to 5 working days in order to prevent unnecessary delays. According to the previous law the application period for registration of newly established or reorganized legal entities was 10 calendar days, while the revised law provides 30 calendar days for application in order to allow legal entities to prepare the necessary documents.

World Bank Group’s Ease of Doing Business 2019 Index ranks Mongolia 74th out of 211 economies in the world.[4]

5.1.2. Corporate Legal Environment

The enactment of the revised Law on Companies(“Company Law”) in 2011 was an important step towards the government’s aim of bringing Mongolian corporate governance standards closer to those found in more developed jurisdictions. The law broadly regulates various aspects – from reorganisation to obligations of shareholders – of companies operating in Mongolia.

If a foreign investor wishes to establish a limited liability company in Mongolia, such company must be registered with the Legal Entities Registration Office (the “LERO”) as a “business entity with foreign investment” (“BEFI”). Under the Law on Investment (“Investment Law”), each foreign investor of a BEFI must invest US$ 100,000 or an equivalent amount in Mongolian tugrugs (“MNT”). This capital requirement must be paid in before the entity can be registered by LERO.

Although the Company Law provided that “shareholders of a limited liability company shall not be liable for the obligations of the company and shall only bear risk of loss to the extent of the shares they hold in the company,” in some cases, governing persons have broad personal liability. For example, the Company Law states that “a shareholder who, alone or in conjunction with its affiliated parties, holds more than 10 per cent of a company’s shares, or who otherwise has the power to control the management of the company, shall be personally liable for any loss incurred by the company resulting from his/her/its wrongful acts.”

In terms of structure, the day-to-day management of a Mongolian company is exercised by an executive director (the rough equivalent of a chief executive officer or general manager in other jurisdictions). An executive director may act on behalf of the company without a power of attorney, within the limits of its authority granted by the board of directors and/or the shareholder. If the company does have a board of directors, the executive director can be a member of the board of directors, but not the chairman.

Any foreign legal entity can establish a representative office in Mongolia. A representative office must also be registered with LERO. Unlike other forms of foreign investment vehicles, there is no minimum capital requirement for setting up a representative office in Mongolia. On the other hand, a representative office is not an independent or a separate legal entity, but rather a liaison office for its parent company; the parent company is entirely responsible for the obligations of its representative office, and the actions of the representative office are deemed to be the actions of the parent company.

A representative office is not permitted to carry out any form of revenue-generating business activities. Nevertheless, a representative office must register as a taxpayer with the tax authority.

A representative office may undertake activities such as market research, coordinating visits and exchanges of personnel, initiating contacts, facilitating meetings with clients, and conducting negotiations on behalf of its parent company or affiliate companies in Mongolia. A representative office may also carry out activities relating to its own office administration, for example engaging the services of Mongolian or foreign employees, obtaining visas and work permits for foreign employees, renting an office space, displaying its name outside of its premises, importing goods for office use, opening bank accounts in its own name and so forth.

5.2. Investing in Mongolia

5.2.1. Legal Framework

Replacing the 1993 Law on Foreign Investmentand the controversial 2012 Law on the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance, Parliament passed a new Investment Law in 2013.

The Investment Law eased the regulatory approval requirements and streamlined the registration process for foreign direct investment. Further, it sets out certain legal guarantees and incentives so as to promote investment activities in Mongolia.

Some of the key features of the Investment Law are:

  • it applies to both foreign and domestic direct investments;
  • no approval requirements are imposed on foreign private investment;
  • the minimum capital requirements for foreign-invested entities in Mongolia is US$ 100,000 per foreign shareholder;
  • there is no classification of strategic economic sectors in terms of foreign private investment, but approval is required for certain equity investments made by foreign state-owned legal entities, which are defined as “legal entities in which a foreign state directly or indirectly holds more than 50 per cent of the entity’s issued shares,” in those sectors that are regarded as strategically important;
  • it provides legal guarantees to protect investment in Mongolia and sets out tax and non-tax incentives so as to promote investment in Mongolia; and
  • it offers tax stabilisation incentives in the form of tax stabilisation certificates and investment agreements.

5.2.2. Investor Protection/Arbitration

Mongolia is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”) and it is possible to enforce foreign commercial arbitral awards in Mongolia. Domestically, the revised Law on Arbitration (“Arbitration Law”), adopted on 26 January 2017, the Law on Civil Procedure, enacted on 10 January 2002 and the revised Law on Enforcement of Court Decisions, enacted on 9 June 2017 govern the procedure for the recognition and enforcement of foreign arbitral awards in Mongolia.

The Arbitration Law does not specifically provide a separate procedure or requirement for the enforcement of foreign arbitral awards. In order to enforce an arbitral award, the award must be recognised by the court. In order to recognize the award, the claimant must file the original or a certified copy (in accordance with the laws of the country in which the award was made) of the said award and a Mongolian translation of the arbitral award if the original award was not issued in the Mongolian language to the relevant district court. The revised Law on Arbitration removed the period to commence enforcement proceedings which was 3 years from the date of the original arbitral award.

In accordance with Article 9 of the Investment Law, the Investment Protection Council of Mongolia (the “Council”) was established under the Government Resolution No.10 dated 3 August 2016 and the Order No.136 of the Prime Minister dated 22 December 2016. The main duties of the Council are to support and provide services to the Government of Mongolia (the “GoM”) with regards to the protection of investors, legal rights and interests in line with the leading priority of the GoM and to organize negotiations for dispute settlement between investors and the GoM or governmental authorities. The Council operates and conducts its activity under the supervision of the GoM and the Chief Cabinet Secretary.

5.3. Taxes

On 9 and 10 November 2017, the Parliament of Mongolia amended the General Taxation Law, the Law on Corporate Income Tax, and the Law on Personal Income Tax, all of which came into force and effect from 1 January 2018.

Under these amendments, a new concept of “ultimate holder” was introduced which was later revised to “ultimate owner” defined under the amendment of previous law on legal entity registration in April 2018 in order to match with the definition in the Law on Combating Money Laundering and Terrorism Financing. Pursuant to such change, the ultimate owner is defined as a person who solely, or persons who jointly, directly or indirectly, exercise a major part of control over the entity, its business and its assets.

On 29 May 2018 and 22 June 2018, revised versions of the General Taxation Law, the Law on Personal Income Tax, the Law on Corporate Income Tax and an amendment to the Law on Value Added Tax were submitted to the Parliament. The revised versions of this package of laws were approved by the Parliament on 22 March 2019 during its extraordinary session and will enter into force from 1 January 2020.

According to the proposed amendments under the revised tax laws, the definition of ultimate holder was revised again to be a person who holds more than 30% in the shares or voting power in legal entities holding exploration and mining licenses, land possession rights, petroleum and radioactive mineral mining licenses.

As the newly passed tax laws have not entered into force we set out, below a brief introduction to the taxes under currently effective laws.

Non-Resident Taxes: The Law of Mongolia on Corporate Income Taxdated 29 June 2006 (“CIT Law”) provides for the taxation of income earned by non-resident taxpayers. The CIT Law lists the following types of income earned in Mongolia or Mongolian-sourced income which is subject to withholding tax at a rate of 20 per cent, unless provided otherwise in double taxation treaties entered into by Mongolia:

  • income on dividends received from an entity that is established and operates in Mongolia;
  • income on interest and payments for issuing guarantees;
  • income on royalties and interest on finance leases, payments for management expenses, rents, and on tangible and intangible asset leases;
  • income on goods sold, work performed, and services provided within the territory of Mongolia; and
  • Mongolian-sourced income on work performed and services provided directly or electronically.

Income Tax: Business entities incorporated in Mongolia are subject to an income tax at a rate of 10 per cent on any income below MNT 3 billion (approximately US$ 1,132,075) per annum. For income above taxable MNT 3 billion per annum, the applicable tax will be a lump sum of MNT 300 million (approximately US$ 113,207) plus 25 per cent on any taxable income in excess of MNT 3 billion. This threshold for determining the tax rate has been increased to be MNT 6 billion (approximately US$ 2,264,1150) per annum under the newly passed revised CIT Law.

Under the currently effective CIT Law, if an ultimate owner sells its shares held directly or indirectly in a legal entity holding exploration or mining licenses and/or land possession rights, it will be treated as a “sale of rights” related to exploration or mining licenses or land possession rights, which will be subject to 30% withholding tax.

According to the revised CIT Law, the transactions deemed as a sale of rights by an ultimate holder will be taxed at 10% (in lieu of the original 30% rate). Such tax shall be withheld and paid by the holder in Mongolia of exploration and mining licenses of minerals, radioactive minerals and petroleum and land possession rights.

The CIT Law provides 36 types of deductible expenses including (among others)[5]:

  • interest payments accrued on sums borrowed for carrying out primary and auxiliary production work and purchasing property;
  • rental payments; and
  • interest incurred on financial lease payments.

These expenses are deductible from the taxpayer’s taxable income.

VAT: The revised Law on Value Added Tax (“VAT Law”) adopted on 9 July 2015 provides that value added tax will be levied on:

  • all goods sold within the territory of Mongolia;
  • all goods exported from Mongolia to foreign countries for the purpose of sale, consumption or use;
  • all goods imported into Mongolia from foreign countries for the purpose of sale, consumption or use; and
  • work performed and services provided within the territory of Mongolia.

According to the VAT Law, legal and natural persons that import or export goods to or from Mongolia, that manufacture and sell goods in Mongolia, or that perform works and provide services in Mongolia will pay the VAT.

The threshold for requirement to mandatory registration as a VAT payer is MNT 50 million, with voluntary registration being possible if the income of the entity reaches MNT 10 million. Certain new provisions introducing a system of incentivising taxpayers with the possibility of recovering up to 20 per cent of the taxes paid if certain conditions are met will come into effect on 1 January 2016.

The taxable amount of VAT for imported goods is determined by adding customs duty, excise tax, and other taxes to customs value determined in conformity with the Law on Customs Tariffs enacted on 20 May 2008. The value added tax rate is 10 per cent of the taxable amount of goods imported. Also, according to the VAT Law, input and output VAT are generally capable of being netted off.

Customs Duty: Customs duty rates are set out in the resolution Number 27 of Parliament on Customs Duty Rates on Imported Goods enacted on 3 June 1999 pursuant to the Law on Customs Tariffs. 97 different types of products and goods have been classified, and, generally, most customs duties are 5 percent, except for some higher rates for agricultural products (up to 20 percent), for alcoholic products (up to 40 percent) and for cigars and cigarettes (up to 30 percent). Exemptions can be granted only by separate law, and, currently, 37 separate laws have been passed to grant exemptions from customs duty.

5.4. Licensing

The Law on Licensing(“Licensing Law”)enacted on 1 February 2001 provides that a licence “refers to rights given to citizens, non-profit and for profit organisations which enables them to carry out certain activities under certain terms and requirements for a certain term.”

Various Mongolian laws require business entities to obtain a licence in order to engage in certain business activities; such licences are typically only issued to legal entities established under Mongolian law (including BEFIs). This means that foreign investors are generally not eligible to obtain such licences and must establish a legal entity in Mongolia for that purpose.

The Licensing Law contains a relatively comprehensive list of business activities that require licences. These activities are divided into the following general categories: (i) banking; (ii)non-banking financial services; (iii) finance and economy; (iv) justice and home affairs; (v) environment; (vi) education, culture and science; (vii) fuel and energy business; (viii) infrastructure, transportation and tourism business; (ix) social protection and labour; (x) industry and trade; (xi) food and agriculture; (xii) health; (xiii) copyright and patent related business; (xiv) construction and urban development business; (xv) information, communication and technology related business; (xvi) standardization and methodology business; (xvii) radioactive minerals and atomic energy business; (xviii) defence-related business; and (xix) disaster prevention business.

The general principle under the Licensing Law is that business activities other than those requiring a licence may be freely conducted in accordance with the relevant laws, standards and regulations upon registration with the relevant registration authorities.

5.5. Bankruptcy

Enacted on 20 November 1997, the Law on Bankruptcy(“Bankruptcy Law”)governs the commencement and determination of bankruptcy proceedings and the restructuring or liquidation of an insolvent business entity. Under the Bankruptcy Law, a debtor is considered insolvent when it is unable to fulfil its obligations in the amount equal to or higher than the value of 10% of its equity by the deadline specified by law or contract. The creditor’s claim for starting voluntary bankruptcy proceedings needs to describe the grounds for considering the debtor to be insolvent, proposals for restructuring or liquidation, and other provisions as specified in the Civil Code. However, due in part to the fact that the legislation is now being updated, there is little precedent on bankruptcy proceedings in Mongolian commercial practice. Individual bankruptcy is not recognised in Mongolian law or practice.

5.6. Currency Conversion and Transfer Policies

The Law on Conducting Settlements in National Currencyenacted on 9 July 2009, which regulates the national currency, requires that MNT must be used for all transactions within the territory of Mongolia, unless specifically approved otherwise by the central bank, the Bank of Mongolia (“BoM”). However, money deposits, loans, equivalent services, financial derivative agreements and obligations under such agreements of banks and non-banking financial institutions can be made and executed in foreign currencies.

In regard to foreign exchange, the Mongolian government employs a liberal regime. Other than in respect of liquidity restrictions, investors and businesses do not encounter any legal restrictions in converting foreign exchange and transferring money to and from domestic and overseas accounts.

Due to currency shortages that are caused by frequent currency rate fluctuations, occasionally Mongolian banks may impose temporary limits on the daily exchange or transfer amounts. Otherwise, consistent with international standards, most wire transfers occur within 1-2 business days.

5.7. Intellectual Property Rights

The Law on Trademarks and Geographical Indications, the Law on Patents, the Law on Copyright and Related Rights, and the Law on Technology Transfer are the main laws that regulate intellectual property in Mongolia. In addition, Mongolia is a member of the World Intellectual Property Organization and signatory of the World Trade Organization Agreement on Trade Related Aspects of Intellectual Property Rights. Although the Intellectual Property Office of Mongolia (“IPOM”), the main enforcer of intellectual property rights in Mongolia, has made significant progress in protecting intellectual property in Mongolia in the last 25 years, due to capacity and resource constraints, the IPOM usually acts only upon receiving complaints, rather than taking a more proactive approach.

5.8. Employment

Depending on the nature of work or duration of work, individuals and legal entities in Mongolia have the option to enter into either (i) an employment agreement governed by the Law on Labour (“Labour Law”), enacted on 14 May 1999; or (ii) hired work agreement or other similar agreements governed by the Civil Code.

The Labour Law specifically prohibits the conclusion of a contract for a “permanent work position” other than an employment agreement. A “permanent work position” is defined as a task or obligation performed during the work day or in shifts in a work place specified by the employer using labour equipment supplied by the employer in accordance with set procedures under the management of the employer or its representative, and receiving wages following approved norms, assessments, and systems. Further, the Labour Law specifically provides that a business entity with foreign investment operating in Mongolia shall conclude an employment agreement with any employee.

The Government of Mongolia submitted a revised version of the Labour Law to the Parliament on 26 March 2018; however, the proposal has not yet been enacted by the Parliament. New concepts in relation to shift work, distance work, as well as classification of labour disputes for the purpose of procedural requirements for dispute settlement have been reflected in the draft law.

5.9. Anti-Corruption Legislation

In Mongolia, acts of corrupt behaviour are primarily regulated by the Law of Mongolia on Anti-Corruption, enacted on 6 July 2006 (“Anti-Corruption Law”), the revised Criminal Code, enacted on 3 December 2015 and the Law of Mongolia on Regulating Public and Private Interests in Public Service and Preventing Conflicts of Interest, enacted on 19 January 2012 (“Conflict of Interest Law”). In 2018, Transparency International Corruption Perception Index ranked Mongolia 93rd out of 180 countries in terms of the perception of the level of corruption in the public sector.[6]

Anti-Corruption Law: Under the Anti-Corruption Law, “corruption” is defined as (i) the “abuse by a person who is subject to the Anti-Corruption Law of his/her official power for private gain; (ii) affording preferences to others; and (iii) any violation of law expressed by way of an action or failure to act which enables an official to obtain a preference from an individual or a legal entity.”

Criminal Code: There is no direct reference to the word “corruption” in the Criminal Code; rather, it makes it a crime for a public official to abuse his/her official duty, power and position, or obtain a preference to him/herself or others.

Conflict of Interest Law: The Conflict of Interest Law aims to prevent conflicts of interest arising between the official duties, and the private interests of those in public service roles. A “conflict of interest” is defined under the Conflict of Interest Law as circumstances where either (i) there is a conflict between the private interests of a public official and public interests which may arise when carrying out his/her official duties; or (ii) it is unlikely that a public official’s official duties can be discharged in a fair and equitable manner.

Glass Accounts Law: On 1 July 2014, the Parliament of Mongolia adopted the Law of Mongolia on Glass Accounts (“Accounts Law”) in an attempt to ensure the efficient and proper use of state and local government funds, the transparency of decisions and actions concerning budget management and public overview of the same.

The key feature of the Accounts Law is that it obliges all government agencies and legal entities with state involvement to make information on budgets and financial matters, including the utilisation of financing and other government indebtedness, available to the public. It should be noted that many of the reporting obligations imposed on government agencies under the Accounts Law were already in existence and reflected in the Law of Mongolia on Transparency of Information and the Right to Receive Information and the Law of Mongolia on the State Budget.

The Accounts Law aimed to address the criticism that information concerning the funds raised by the government through the issuance of securities and the use of those funds was not publicly available and accordingly, there was limited accountability to the public. The Accounts Law prescribes that debentures and other financial instruments, foreign and domestic loans and grant aid, public and private partnerships, concessions and guarantees which create budgetary payables and receivables will only become effective upon being disclosed to the public by placing them on the central “glass account” website.

5.10. Competition Law

The Law on Competition, enacted on 10 June 2010, facilitates fair competition and regulates anti-trust concerns. The Agency for Fair Competition and Consumer Protection is the main enforcer of the law and monitors commercial transactions and consumer-facing business operations for potential anti-trust or consumer protection violations.

5.11. Mining

5.11.1. Minerals Regulations

Mongolia has effected several important changes in the past few years to its minerals regime, such as the adoption of the State Policy on Minerals, the enactment of the Law on Common Minerals and the Amendment to the Law on Minerals (“Minerals Law”), all in an effort to retire the mining sector and ensure continued economic growth.

5.11.2. Environmental Regulations

The mining sector plays an important role in the economy of Mongolia and accounted for over 20% of GDP in 2018.[7] After a sharp slowdown during 2014-2016 driven by a fall in commodity prices and declining foreign direct investment, the Mongolian economy recovered in 2017 and the first half of 2018. Growth outlook remains positive in 2018 and beyond, mainly supported by robust growth in private consumption and private investment in mining and manufacturing. It is still expectably the major force of economic growth for the development of Mongolia in the coming years. However, the increasing level of mining activities also raises, among others, issues of environmental protection and restoration. Although a comprehensive Mongolian environmental regulatory regime existed, and the Minerals Law covers licence holders’ obligations towards the environment, the government did not consider it to be adequate in practice. Attempts had been made to resolve this issue on a piecemeal basis by adopting several measures in last few years, such as increasing water abstraction fees, imposing stricter environmental obligations on mining licence holders and requiring the deposit of environmental restoration bonds. Further, in July 2009, Parliament adopted the Law on Prohibition of Mineral Exploration and Mining Activities in areas in the Headwaters of Rivers, Protected Water Reservoir Zones and Forested Areas to address environmental concerns.

The Law on Environment is aimed to reduce duplication and improve the quality of regulation, ensure responsible, environmentally-friendly and sustainable development, improve economic efficiency, introduce international standards in environmental auditing and the “polluter pays” principle, increase public participation in environmental decision-making, and secure funds for environmental protection.

5.12. Banking/Finance

5.12.1. Banking

Currently, the Law on Banking enacted on 28 January 2010 (as amended) provides the general regulatory framework for carrying out banking activities and offering banking-related services in Mongolia. Parliament approved the revised version of the Law on Securities Market (“Securities Market Law”) on 24 May 2013, which came into force on 1 January 2014. As a framework regulation it is subject to implementing regulations which are to be issued by the relevant regulators.

Although the Mongolian banking sector is quite developed, the Mongolian securities market is still at an early stage of development and the applicable regulatory framework is not as sophisticated as that of other more established jurisdictions. Reforms are underway to modernise the legal and institutional framework of securities market.

5.12.2. Capital Markets

In Mongolia, public trading in securities only commenced in 1995 and capital-raising opportunities are limited. Industries are still heavily reliant on conventional debt financing. The Mongolian Stock Exchange has over 217 listed companies. Total market capitalisation of all the listed companies is around US$ 905,661,000 (approximately 2.4 billion tugrugs) as of the end of 2017, which is a significant rise of 57.7 percent compared to the maximum result of 2015, as well as the highest record of last 5 years. Average daily trading volumes are approximately between MNT 30 to 150 million, which represents only a handful of securities. Only three forms of securities are publicly offered and traded at the moment, being open joint stock company shares, bonds, and Government retail securities, which have been traded since November 2014.

The revised Securities Market Law was enacted to overcome the absence of an enabling regulatory framework that restricts capital-raising opportunities for Mongolian companies and to introduce international standard market regulations. In doing so, the monitoring and regulatory authority of the Financial Regulatory Commission is increased in order to counter-balance the increased accessibility to the market.

In order to promote secondary listing of both foreign and domestic legal entities, in January 2018, the Financial Regulatory Commission approved the “regulations on secondary listing in Mongolia of securities of legal entities listed on a foreign stock exchange, and on listing of securities of legal entities listed on the Mongolian stock exchange to be listed on foreign stock exchanges.

5.12.3. Security Interests

The principal form of security interest is a “pledge”. Under Mongolian law, in principle it is possible to take a pledge over immovable and movable property, as well as proprietary rights such as intellectual property rights. In almost all cases, the creation of a security interest by way of entering into a relevant pledge agreement and where equitable, registering the security interest, is sufficient for perfection of the interest.

Due to the under-developed capital market with low liquidity, the vast majority of financing in Mongolia comes through conventional debt financing. Financing costs are comparatively high in Mongolia, where interest rates are currently in double digits.

In addition, borrowers must provide an adequate level of security to ensure the repayment of funds extended by financial institutions. However, in Mongolia the pool of assets that could provide reliable and enforceable security is limited. This makes financing more difficult and less accessible for small and mid-sized companies. This is due to the shortcomings of the existing regulatory regime governing security, and in an effort to modernise security regulations in Mongolia, Parliament passed the Amendment to the Law on Pledge of Immovable Properties and the Law on Pledge of Movable Property and Intangible Assets in July 2015, which will enter into force on 1 March 2017.

The Parliament passed the new Law on State Registration of Property Rights on 21 June 2018, which replaces the previous Law on State Registration of Property Ownership Rights and Related Rights and has become effective from 1 November 2018. The new Law aims to strengthen the accuracy and interaction of the database system of registration to improve effectiveness of the property ownership rights and related rights including among others, pledges and mortgages. No material changes regarding the principles or regulations on enforcement and registration of the pledge were made under this new law.

5.13. Other Industries

5.13.1. Petroleum Sector

Mongolia is nearly entirely dependent on the import of finished petroleum projects. Given the risk to the country’s national security posed by this dependence, Mongolia has been trying to develop its domestic petroleum sector by attracting foreign investors through a revision of its legal framework and by introducing tax incentives for oil refineries.

The Law on Petroleum (“Petroleum Law”), enacted on 1 July 2014, distinguishes between two main categories of petroleum products, being: (i) “oil” and (ii) “unconventional” oil. Oil refers to crude oil and natural gas in addition to refined petroleum, whereas unconventional oil refers to oil sands and oil shale.

The Petroleum Law identifies three types of petroleum-related activities: (i) research, (ii) exploration, and (iii) extraction. Exploration and extraction activities for oil and unconventional oil are subject to licensing procedures under the Petroleum Law whilst other activities, such as research and the storage and transportation of petroleum, are subject to the issuance of permissions or approvals from the relevant authorities. Such permissions usually involve a simple approval process, whereas licences involve more complicated procedures whereby applicants must satisfy more rigorous requirements provided under the relevant laws and regulations including the entry into of a production sharing agreement until the Mongolian government.

The Ministry of Mining and the Mineral Resources and Petroleum Authority of Mongolia (“MRPAM”) are the two primary regulators for the petroleum sector. The Ministry of Mining is responsible for policy issues, the issuance of licences and organising tenders for exploration sites. MRPAM is the main implementing authority responsible for matters such as concluding production sharing agreements (as authorised by the Cabinet), approval of annual plans, and the supervision of licence fee payments.

6. Concessions

The Law on Concessions(“Concession Law”), enacted on 28 January 2010, sets out the principal characteristics of concessions in Mongolia. Concessions are defined as “the special right to possess, use, newly-create, or redevelop state or local authority property or assets on a contractual basis in accordance with the conditions and procedures specified in the Concession Law for the purpose of providing infrastructure or rendering fundamental social services to the public.” This definition is relatively broad in meaning and therefore it appears that any type of agreement in relation to the assets or property of the state or a local authority could potentially be subject to a concession.

The Concession Law provides further details in respect of concessions, such as concession types, the rights and powers of the state authorities, the rights and duties of concession holders and the statutory conditions to be included in concession agreements.

7. Legal Resources

Up to date free Mongolian legal resources in English are still difficult to source. However, there have been significant improvements in the last few years, especially in the online dissemination of Mongolian laws and regulations.

In December 2014, Parliament ratified the U.S.-Mongolia Transparency Agreement, which stipulates that the Parliament of Mongolia should publish laws and regulations relating to international trade and investment in English. Although it is not clear when the agreement will take effect, it would make it easier for U.S. and other foreign enterprises to do business and invest in Mongolia.

7.1. Online Legal Resources

7.2. Institutions

7.3. Selected Books

  • Butler, W. E., The Mongolian Legal System: Contemporary Legislation and Documentation, Martinus Nijhoff Publishers (1982).
  • Chimid B., Conception of the Constitution of Mongolia (2003).
  • Chimid B., Knowledge of Constitution (2008).
  • Jantsan S., Criminal Law Theories of Mongolia (2009).
  • Lundendorj N., Concepts of State and Law: Development Trends (2002).
  • Lundendorj N., Theory of State (2006).
  • Lundendorj N., Transparency Period: Political and Legal Issues (2010).
  • Narangerel S., Mongolian and the World Legal System (2001).
  • Narangerel S., Legal System of Mongolia (2004).
  • Odgerel P., Administrative Law: General Section (2008).
  • Sarantuya Ts., Theory of Rule of Law (2000).
  • Sovd G., The Development of the Legal System of Mongolia and its Characteristics (1996).


[1] “LegalInfo.” http://www.legalinfo.mn/law/?cat=27 (Accessed on 19 March 2019).

[2] Judicial Council, http://www.judcouncil.mn/main/1287–.html (Accessed on 19 March 2019).

[3] Judicial Council, http://www.judcouncil.mn/main/1287–.html (Accessed on 19 March 2019).

[4] “Ease of Doing Business”, World Bank Group. http://www.doingbusiness.org/data/exploretopics/starting-a-business (Accessed on 28 July 2015).

[5] Business Entities Income Tax Law, Article 12.1.

[6] “Transparency Report”, Transparency International. https://www.transparency.org/cpi2014/results (Accessed on 11 August 2015).

[7] “The World Bank in Mongolia”, The World Bank Group. http://www.worldbank.org/en/country/mongolia/overview (Accessed on 28 July 2015).